CHICAGO — The South Dakota Housing Development Authority is offering homebuyers the lowest interest rate in its history, thanks to recent changes in the federal New Issue Bond Program.
The Obama administration launched the program late last year to boost housing finance agency issuance of affordable-housing bonds that support low- to moderate-income families.
Under the program, the Treasury Department agreed to buy state and local HFA bonds through Fannie Mae and Freddie Mac.
The original program rules required issuers to sell the bonds, usually short-term, by the end of 2009. Proceeds would be placed in escrow, and the issuer would be allowed to go to market up to three times over the course of 2010 to convert the securities to long-term debt. Proceeds would be used to finance new mortgage loans.
Many agencies took advantage of the program, but issuance remained low as bank-offered mortgage rates fell to historic lows this year, depressing homebuyers’ interest in HFA mortgages. But recent changes in the program allowed issuers like the SDHDA to lock in lower long-term rates on its bonds, passing the savings on to homeowners.
The changes extended the program for another year, through December 2011, allowed HFAs to enter the market six times during that period to refinance its debt, and let them lock in new rates linked to the 10-year Treasury bond.
The SDHDA originally sold $193.1 million of debt under the program last year, paying a 4.24% interest rate, said finance director Todd Hight. By locking in a new rate of 3.33% a few weeks ago, it was able to drop its mortgage rates below bank-offered rates for the first time all year.
“The new rate lowered our bond costs by 91 basis points,” Hight said. “Locking in our long-term bonds at lower rates allowed us to make our mortgage rates that much lower as well.”
The authority dropped its mortgage rate to 3.75% from 4.5% for a 30-year fixed-rate mortgage, and offers rates as low as 2.75% on some loans.
Even with the newer low rate, it is unclear whether interest in the program will return to normal levels. “We hope, but I don’t know if the market is there. I don’t know if people are buying or if it’s stagnant,” Hight said.
The agency in June priced $100 million of NIBP bonds, selling $60 million to the Treasury and privately placing the remaining $40 million with Citi. That was in accordance with the program’s rules that caps the Treasury’s purchase at 60%, with 40% to be sold on the private market.
The private placement — the authority’s first in at least six years — allowed it to escape marketing the debt to a retail market that has been reluctant to purchase HFA debt since the housing crash.
The authority plans to enter the market again in mid-October to sell another chunk of the escrow debt. The size of the issue depends on the demand for mortgages over the next few months, Hight said.
Bank of America Merrill Lynch will manage the deal.